After his trip to space, Jeff Bezos might be the winner of the Covid-19 pandemic – but the fintech industry is a close second. Digital financial services providers have seen even the most reluctant cash-under-the-mattress savers turn online over the past 18 months as governments warned that using physical money can spread the coronavirus.
This has manifested itself in record numbers for both valuations and public listings of fintech firms. This month alone, banking and payments app Revolut became the most valuable start-up (not just fintech) in the UK, valued at £24 billion, and Wise (formerly known as TransferWise) set a London Stock Exchange record for a tech company with an £8 billion IPO.
Most of the hottest names in the industry still remain in private hands for now, so we bring you the biggest names at different stages of their growth journey.
The Stalwarts
Three companies that we all associate with cashless transactions today are Visa (V), Mastercard (MA) and PayPal (PYPL). Visa is the largest payment processor in the world and holds a significant market share, processing almost $9 trillion in purchase transactions last year. It has a sound balance sheet and a wide economic moat rating. And, the company is all set to benefit from the long runway for growth in electronic payments. In the near term, however, the company has seen a decline in travel, and has been underperforming compared to its competitor Mastercard.
Mastercard also holds a 2-star rating and a wide moat. In 2020, the world’s second-largest payments processor processed $4.8 trillion in transactions, and while it has lagged Visa in cross-border volumes, it has outperformed on growth. The state of the economy is the company’s biggest risk but the processor is set to continue its double-digit growth in coming years.
Narrow-moat PayPal is another payments provider that holds a comfortable market position. As the line between online and in-person transactions is blurring, the company face more competition, for example from Apple Pay, but it benefits from a solid network of merchants and consumers. Its management has set a target of 20% annual growth over the next five years and aims to complete between $1-3 billion in acquisitions annually going forward. However, it holds a 1-star rating as Morningstar analysts believe the current valuation does not take long-term competition into account.
The Newcomers
Wise (WISE), formerly known as TransferWise, has been on everyone’s lips after its record IPO. The fintech mainly provides cross-border money transfer services but is slowly moving into the so-called financial “super-app” space, offering a range of day-to-day services as well as business accounts and a software product called Wise Platform. The company completed a direct listing on the London Stock Exchange July 7, meaning no new shares were issued and no funds were raised. In 2020, it processed just over 2% of all global retail cross-border payments and the company has been profitable since 2017.
Coinbase (COIN) is another stock that shot into the public eye earlier this year. First due to the meme stock and cryptocurrency boom in January, then because its direct IPO in April closed at $328.28 per share, making its valuation an astonishing $85.78 billion – landing Coinbase immediately in the top 100 most valuable companies in the US. The crypto wallet and trading app derives its revenue from transaction fees. Robert Le, analyst at Pitchbook, a Morningstar company, does however believe that Coinbase will be hard-pressed to maintain its growth path as many competitors seek to attract its customers by lowering those fees.
A slightly older listing is Dutch firm Adyen (ADYEN), which has built payment systems for the likes of Uber and Spotify. It has managed to establish a wide moat since its IPO in 2018, when it was valued at $8 billion, and in 2020 it reported 27% year-on-year growth. Adyen is popular because it works across the value chain, including online, in-store, and mobile payments, through one single service. It also provides fraud detection and has impressive transaction and payment data to support growth. Investors like Adyen because it provides exposure to the same growth fundamentals as tech giants while also generating cash.
Most recently, one of the hottest listings for 2021 was meant to be the Robinhood IPO (HOOD). The company was expected to follow in Coinbase’s footsteps, but instead failed to meet floatation expectations and falling 8.4% on its first day of trading. The brokerage app offers equity, derivative and cryptocurrency trading and soared in popularity during the meme stock boom. However, it has also been criticised for gamifying investing, “payment for order flow” practices (paying brokers to execute buy and sell orders) and freezing trades. It was also fined in June for causing “widespread and significant harm” to customers, and it had to raise emergency funds in February to meet clearing house obligations.
Expected IPOs
Moving onto highly anticipated IPOs, Stripe is a name that gets a lot of attention. The digital payments processor is the most valuable US technology start-up, worth $95 billion. It processes hundreds of billions of dollars in transactions every year for millions of businesses, including Google, Uber and Amazon. It also counts Elon Musk as an early investor and recently saw former Bank of England governor Mark Carney join its board. The company has reportedly hired a legal adviser to prepare for a public listing.
In the UK, Revolut is the challenger bank that’s tapped to be the next listing. It is one of the most popular digital banks in Europe, underpinned by its $800 million funding round which gave it a valuation of $33 billion (£24 billion). The company started out with a focus on FX but has since added a comprehensive list of services like investing, crypto and business offerings. It has been profitable for a couple of months. The company has said it is not planning an IPO this year, but will eventually look to go public in the US.
In China, Ant Group, which spun out of Alibaba and owns Alipay, was expected to go public in late 2020 but was halted by regulators at the 11th hour. The company provides a tool for payments, government affairs, local life, and other sectors to provide consumers with one-stop digital daily life services. The company's valuation was written down from approximately $315 billion to $144 billion in February 2021 due to a forced restructuring, but the company still enjoys a dominant position in the Chinese market, with a market share of 55%.
